A market inefficiency is a situation in which the price of an asset does not fully reflect the information available about it, so that it trades away from fair value. The idea is defined against the efficient market hypothesis, which holds that prices adjust to new information so quickly that no trading rule can earn more than a fair reward for risk. An inefficiency is an exception: a pattern in prices that, in principle, allows a return above that level.
Documented examples include momentum and post-earnings announcement drift. Explanations fall into three groups: the errors of judgement studied in behavioral finance, frictions such as trading costs and limits on short selling, and the risk and capital constraints that stop arbitrage from closing a gap. Whether a pattern is a true inefficiency or pay for hidden risk is disputed. Those that are real tend to shrink once widely known, as capital from statistical arbitrage and similar strategies competes for them.